06.22.15
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Pension America – Taking Control Of One’s Destiny

For pension plan participants defined benefit plans (DB) must remain the backbone of the US Retirement Industry

The true objective of a pension plan is to fund liabilities (monthly benefits) in a cost effective manner with reduced risk over time. Unfortunately, it has been nearly impossible to get a true understanding of a plan’s liabilities outside of the actuary’s report, which is received by sponsors and trustees only on an annual basis, at best, and usually many months delinquent.

Fortunately, a plan’s liabilities can now be monitored and reviewed on a monthly basis through a groundbreaking index developed by Ron Ryan and his firm, Ryan ALM – The Custom Liability Index (CLI). The CLI is similar to any index serving the asset side of the equation (S&P 500, Russell 1000, Barclays U.S. Aggregate, etc.), except that the CLI measures your plan’s specific liabilities and not some generic liability stream. This critically important tool calculates the present value, growth rate, term-structure, interest rate sensitivity of your plan’s liabilities, and other important statistics such as, average yield, duration, etc. With a more transparent view of liabilities, a plan can get a truer understanding of the funded ratio / funded status.

The use of the CLI enables plan sponsors, trustees, finance officials, and asset consultants to do a more effective job allocating assets and determining funding requirements (contributions). The return on asset assumption (ROA), which has been the primary objective for most DB plans, should become secondary to a plan’s specific liabilities. Importantly, as the plan’s funded status changes, the plan’s asset allocation should respond accordingly.

Importantly, the CLI is created using readily available information from the plan’s actuary (projected annual benefits and contributions), and it is updated as necessary to reflect plan design changes, COLAs, work force and salary changes, longevity forecasts, etc. In addition, the CLI is an incredibly flexible tool in which multiple views, based on various discount rates, can be created. These views may include the ROA, ASC 715, PPA, GASB 67/68, and market-based rates (risk-free), with and without the impact of contributions.

Why should a DB plan adopt the CLI? As mentioned above, DB plans only exist to fund a benefit that has been promised in the future. As a plan’s financial health changes the asset allocation should be adjusted accordingly (dynamic). Without having the greater transparency provided by the CLI, it is impossible to know when to begin de-risking the plan. You’ve witnessed through the last 15 years the onerous impact of market volatility on the funded status of DB plans and contribution costs. Ryan ALM and KCS can help you reduce the likelihood of a repeat, and very painful, performance.

06.16.15
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NJ’s Pension Battle – We Are All Losers

Last week the state Supreme Court of NJ ruled that the Christie administration had the right to reduce / eliminate the annual required contribution (ARC) for the public pension system, based on a constitutionally established practice that the responsibility to allocate public funds is embedded in the budget process. What appears to be a victory for Christie and NJ tax payers couldn’t be further from the truth!

In a pattern that has been repeated for nearly 20 years, one NJ “leader” after another has failed to make the necessary payments to adequately fund public pensions. By not making the full contribution again this year, we are once again kicking the proverbial can down the road.

Remember folks, the benefit that has been promised to our public fund employees is a LIABILITY that must be met. Not funding that liability only makes it more challenging for the pension plan in the long-term, as the plan loses the benefit of compounding returns / interest on each contribution.  Just think about the economic impact of not funding the $3.1 billion in 2015, especially if the plan would have earned the state’s presumed return on assets over the next 10-20 years.  By deferring that payment, we create a pay as you go system that is much more costly for everyone.

Furthermore, NJ’s pension issue isn’t just a matter of not making the annual required contribution. Why on earth would NJ’s pension officers decide to invest heavily in hedge funds / alternatives at the bottom of the market in 2009?  This decision has increased management costs, while returns on the funds have substantially underperformed cheap equity beta. DB plans have a relative objective (liabilities) and not an absolute objective (ROA). Using absolute product in a relative return environment makes little sense.

Our elected officials are kidding themselves If they think that the pension liability is somehow going away.  By not appropriately funding the liability now, they are only making it more difficult for the state the future.  Think that pensions are taking a big slug of NJ’s budget now, just wait for another 15-20 years.

06.11.15
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The latest Iteration of the “High School Dance”

It has been a very long time since I was in high school, and as a result, things may be different today.  But, what I remember about my high school days and the dances at Palisades Park, NJ, were that the boys stood on one side of the gym and the girls stood on the other.  Occasionally a couple of girls would dance, but there was little fraternizing among the boys and girls.

Well, I get the same sense about the management of DB pension plans today, as I did at those dances a very long time ago.  It seems to me that we have on one side of the “gym” assets and on the other side is liabilities, and never the twain shall meet.  As a result, DB plans haven’t found their rhythm and there is no dancing!

We get periodic updates from a number of industry sources highlighting how the funded status is improving or deteriorating.  But we don’t seem to get a lot of direction on how we should mitigate the volatility in the funding of these extremely important retirement vehicles.  I can say with certainty that it isn’t striving to achieve the ROA.  That’s been tried, and DB plans continue to see deterioration in their funded ratios.

For too long, the asset side of the pension equation has dominated everyone’s focus, and as a result, a plan’s specific liabilities are usually only discussed when the latest actuarial report is presented, which is on a one or two year cycle.  This isn’t nearly often enough. We suggest that the primary objective for the assets should be the plan’s liabilities, and that every performance review start off with this comparison.  However, in order to get an accurate accounting of the liabilities one needs a custom liability index (CLI).

In order to preserve DB plans we need assets and liabilities dancing as one. Without this, DB plans face a very uncertain future. Are you ready to bring both parties to the dance floor?

06.10.15
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Next 10 years Could Really Challenge Your ROA Assumption – Are You Ready?

According to Standard & Poor’s Institutional Market Services, which polled 679 defined benefit plan sponsors, the median return on asset (ROA) assumption is 7.56%, down slightly from 2013.  How realistic is this objective?  According to Rob Arnott, sponsors will have a very difficult time in the near future meeting this objective. Arnott gave investors a gloomy forecast for medium-term returns at the Inside ETFs Europe conference recently, and urged the audience to think of a new way to attack the ROA challenge.

According to Arnott, “10-year forward-looking expected returns are unanimously low.” He is predicting that Core fixed-income stands at 0.5 percent real returns as well as long-dated inflation linked bonds. Long Treasuries will go barely above zero. U.S. equities are 1 percent above inflation, and small-caps also give 1 percent, despite their yield of 1.8 percent.

Furthermore, the “Growth of earnings and dividends over and above inflation is 1.3 percent, not the 5 percent or more that Wall Street wants us to believe,” said Arnott.

Importantly, these real return expectations are before fees, which for many active strategies would “eat” most of the potential gain. Arnott’s research found that the U.S. top-quartile active manager pockets 0.9371% of the “alpha” and only passes on 0.0629% on to the client.

The plan sponsor quest to meet the ROA challenge has also produced exceptional volatility.  In the next 10 years, volatility is likely to remain at these levels or increase, but it seems that the return won’t be there to compensate for that extra volatility.  Importantly, we believe that liability growth is likely to be flat to negative during the next 10 years as interest rates rise, so a more conservative asset allocation may accomplish a sponsor’s funding goal.

We would suggest that a plan sponsor focus more attention on the plan’s liabilities to drive asset allocation decisions.  However, in order to accomplish this objective, the plan needs to have greater transparency on their liabilities.  Receiving an actuarial report every one or two years will not suffice.  In order to gain greater clarity, we would suggest that plans have a custom liability index (CLI) produced. The CLI will use various discount rates, and will provide a view with and without contributions factored in.  The CLI is provided on a monthly basis.

As a reminder, the only reason that a DB plan exists is to fund a benefit that has been promised in the future. Knowing how that benefit is changing on a regular basis should be a goal of every plan. We stand ready to provide you with the tools necessary to gain greater transparency on your plan’s liabilities, since it doesn’t seem that plan’s will win the funding game by generating outsized returns in the next decade.

06.04.15
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Let Kamp Consulting Solutions Be Your DB Plan Advocate

Since KCS’s founding in August 2011, we have worked tirelessly to preserve defined benefit plans as the retirement vehicle of choice for both employees and employers.  Now, more than ever, our effort is needed.  With each passing day, week, month and year, it is becoming increasingly obvious that defined contribution plans are nothing more than glorified savings accounts, at best!

The Federal Reserve’s Household survey, released earlier this week, highlights the challenges facing or employees in trying to save and manage their retirements, as a significant portion of our labor force have accumulated nothing for retirement.  As we’ve stated on numerous occasions, there will be profound social and economic consequences for the US if we can’t manage its workforce through a dignified retirement.

The US economy is still only muddling through 6+ years following the great financial crisis. Much of the “credit” for the muted recovery and lower demand for goods and services can be attributable to weak wage growth.  Importantly, the modest growth in wages doesn’t just impact demand today, but it makes saving for tomorrow that much more challenging.

We need to secure our employee’s retirements through a monthly annuity structure that is best achieved through a DB plan or DB-like structure, such as Double DB. Unfortunately, the elimination of DB plans has been on an accelerated path, and according to the DOL, there are fewer than 25,000 active DB plans today (down from roughly 150,000 in ’86). We’ve seen estimates that the median DC account balance is <$15,000.  An account balance of that size will hardly get one through a year, let alone a retirement.

Furthermore, we shouldn’t be vilifying those employees who are fortunate to be in DB plans, but we should explore opportunities to extend their reach for those that aren’t.  Despite the fact that there are many plans that appear to be dramatically (and maybe unsustainably) underfunded, there are new approaches to the management of DB plans that can be implemented, which will set a plan on a glide path to financial wellness.  We sincerely appreciate that funding volatility can create havoc for both corporate and public entities, but that funding volatility can be mitigated, too.

The last thing that we want to witness is the further erosion in the use of DB plans in favor of DC offerings.  No one is going to win if that occurs. The impact on the employee is obvious, but has corporate America truly assessed the impact from a failed retirement system on the ability of US citizens to remain active members of the economy? KCS has the tools to stabilize and improve the funded status of your DB plans to truly make them viable offerings for the long-term. Let us be your advocate, especially if there is an attempt to freeze or terminate your plan at this time.

06.01.15
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Where Is The Disconnect? Which Americans?

Americans Feeling Better About Household Finances — Fed Survey

The above is a title from a WSJ article that appeared today. Based on the title, one would think that the average US adult is doing fairly well, and in fact, “a total of 65% of respondents in the Fed’s 2014 Survey of Household Economics and Decision making said they were “living comfortably” or “doing okay,” up from 62% in the 2013 survey, the central bank said Wednesday. In fact, “Some 29% in 2014 said they expected their income to be higher in the next year, up from 21% a year earlier.”

That all sounds rather positive until one pulls back the curtain on the true detail.  “For many Americans, household finances remain fragile: 47% said they wouldn’t be able to cover a $400 emergency expense or would have to borrow money or sell something, and 31% said they went without some form of medical care in the last year because they couldn’t afford it.”  I find it truly outrageous and disconcerting that forty seven percent of responders couldn’t meet an unexpected $400 medical emergency!!  I find it perplexing that 65% can claim that they are doing at least okay if some percent of them couldn’t come up with $400 to meet an unexpected expense.

We continue to read in the financial press how quality jobs are being created and that the unemployment rate is once again nearing “full employment”. But what doesn’t seem to get the same air time is that we have nearly 93 million age-eligible workers on the sidelines.  Among those working, there is a significant % that are forced to work multiple part-time jobs just to get by, and many of our full-time workers are in a position of underemployment given their skill set.

As you know, we are not going to see a strong economic recovery without getting an increase in demand for goods and services.  However, with this much potential demand on the sidelines, we aren’t going to see our corporations investing in plant, equipment, and inventory, likely reducing further employment gains.

Lastly, it was reported that 31% of non-retirees said they had no retirement savings or pension.  If we want to be able to manage our workforce through a normal life cycle, we need to once again find retirement vehicles that actually help employees save so that they can retire. Defined contribution plans are glorified savings vehicles. DB like plans need to be re-introduced so that we can actually retire our employees with the financial means to remain active participants in our economy.

I am outraged, by the results from this survey, and you should be, too. We are creating an environment that continues to favor only a select few, and they certainly don’t have the ability to prop everyone up.  There will be grave economic and social consequences as a result of our inability to get everyone participating in this economy!

06.01.15
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KCS’s June 2015 Fireside Chat – Exploring Closed-End Funds

We are pleased to share with you the latest edition (#35) in the KCS Fireside Chat series. In this article we explore closed-end funds, and specifically, how they differ from their more common open-end mutual funds.  We hope that you enjoy.

Click to access KCSFCJun15.pdf

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05.26.15
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The Wrong Objective Gets One The Wrong Outcome!

The financial press continues to focus on the wrong benchmark for DB plans.  Here is an example of what gets reported all the time: “Utah Retirement Systems returned 7.52% in calendar year 2014, surpassing its benchmark return by 151 basis points and meeting its actuarial assumed rate of return.”

What’s the issue? DB plans only have one true benchmark – their liabilities! A DB plan only exists to meet a promised benefit. In addition, the plan’s liabilities don’t grow at the return on asset (ROA) assumption. The liabilities grow or diminish in value with changes in interest rates.

2014 was a bad year for DB plans, as liability growth far outpaced asset growth.  Utah’s 7.52% may look good relative to some hybrid asset benchmark, but I suspect that the funded ratio and funded status once again deteriorated.

Let’s stop focusing exclusively on assets. If plan sponsors and their consultants had focused more on their specific liabilities, I believe that DB plans wouldn’t have had to rethink their benefit formulas or worse frozen and terminated plans at the rate that they have been.  The US economy cannot afford to have everyone’s retirement be dependent on accumulated balances in defined contribution plans.

05.20.15
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Double DB® – Answers To Your Questions

Earlier this week we shared with you the virtues of Double DB® and encouraged you to reach out with any questions.  I am very pleased with the response that we’ve gotten.

As a reminder, a group of us have confronted two important pension issues: pension cost volatility and resultant perilous pension indebtedness due to prior underfunding (see Illinois, NJ, and a host of other plans).

We have developed an over-arching, patent pending answer to all of it – Double DB®, which;
(1) Provides pensions, not “employee accessible” cash.
(2) Is “percentage of payroll” financed.
(3) Easily “manages” debt from past underfunding.

Here are some of your questions.

Q: How do you manage debt from past underfunding of a traditional DB plan?

Have the plan actuary determine the percentage of payroll expected to finance the plan debt in 30 years based on the actuary’s estimate of the rate of growth in the underlying payroll and the estimate of the rate of growth of the debt. Plan to allocate this percentage of payroll to debt financing every year. If it turns out that more or less than 30 years is required, simply accept the longer or shorter term or adjust the allocated percentage of payroll along the way.

Q: How do you fund and manage Double DB®?

Have the actuary determine the percentage of payroll needed to finance future service benefits of the plan. Plan to pay this percentage of payroll in every future year. In the first year, plan to place one half into a trust fund identified as DB1 and the other half into a trust fund identified as DB2. In the second and each future year, place the then actuarial cost of half of the future service benefit cost into DB1 and the remainder into DB2. Accordingly, one half of the future costs of the plan will always be financed on an actuarially sound basis within DB1, while DB2 will have assets reflecting the extent that experience is more favorable or less favorable than expected at the outset.

Q: What benefit can the employee expect to receive?

In each year of retirement a pensioner will receive one half the scheduled plan benefit from DB1 and an experience modified variation of the scheduled plan benefit from DB2. If an entering plan participant would prefer to have a level benefit rather than the two-part benefit as described, he/she may elect an option to receive, say, 90% of DB1 benefits from DB2 and thereby receiving 95% of the benefit value to which he/she is entitled in retirement. Accordingly, the DB2 component of the plan will be provided a 10% “fee” for taking the risk of paying a larger benefit than the benefit to which the pensioner was entitled over the years of retirement. The 90% component can be more than 90% if the actuary for the plan is satisfied that a higher percentage is justified based on his/her appraisal of the risk.

We thank you for your continued interest.  Please don’t hesitate to bring additional questions to our attention.

05.18.15
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Double DB® – The Answer to a DB Plan’s Funding Volatility and More

Level cost, as a percentage of payroll, is the preferred basis for financing any retirement plan obligation, which is why 401(k) type defined contribution systems have become the nation’s most prevalent retirement vehicle.

Aware of this development and concerned about pre-retirement spending of accumulating funds by participating employees (loans, premature withdrawals), a group of us have confronted the culprit issues: pension cost volatility and resultant perilous pension indebtedness due to prior underfunding (see Illinois, NJ, and a host of other plans).

We have developed an over-arching, patent pending answer to all of it – Double DB®, which;
(1) Provides pensions, not “employee accessible” cash.
(2) Is “percentage of payroll” financed.
(3) Easily “manages” debt from past underfunding.

While accomplishing the above tasks, Double DB also removes the individual from having to manage these retirement assets.

If you would like to have a conversation about how a conversion of a current defined benefit plan to a Double DB® plan might work, please ask and we can send illustrative language or provide contact with our attorney / actuary.

Finally, It may be of interest to note that Chief Counsel’s Office of IRS regards the Double DB® concept favorably.